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How can using a credit card affect your credit score?

Credit cards are an essential financial tool. How do they affect your credit score?

09 March 2022Lloyd Smith 7 min read
How can using a credit card affect your credit score?

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Credit cards are incredible financial tools of security as well as convenience. They can be useful especially when you don’t have cash at hand or you just don’t want to worry about cash while making purchases.

But can having credit cards affect your credit score and in turn make it difficult for you to get future credit applications approved? Let’s take a look:

A credit score helps gauge the creditworthiness of an individual. The score is present on the credit report and it is majorly based on the individual’s ability to repay their extended credit on time.

The credit score is calculated based on the individual's previous repayment history along with other financial actions and factors. That means people that have paid the majority of their credit repayments on time are bound to have a higher credit score than the ones that end up missing their repayments from time to time.

Moreover, the higher your credit score is, the better offers you will end up receiving from lenders and banks in the form of reward benefits as well as lower interest rates. On the other hand, low credit scores can make it difficult for you to get new credit products or credit extensions approved. That is because banks consider people with high credit scores as low-risk individuals.

A significantly poor credit score or rating can make it incredibly challenging for you to get a new credit card, loan, or even insurance.

Credit scores are typically determined by credit bureau agencies and they can be found on your credit report.

It's important to note that different credit scoring agencies calculate credit scores differently, with their own factors. Though, all of them follow the same principle – The higher the credit score, the better.

The minimum credit score for a credit card will depend on the type of credit card you are applying for. For more info on credit cards, read our guide.

If your credit report states that your score is out of 1200, then a good credit score will be a score above 661. A credit score above 853 will be considered excellent.

In case your credit report shows a score out of 1000, then a good credit score will be one over 540. A credit rating over 690 will be considered excellent.

Owning a credit card does not directly affect your credit score. But the way you use your credit card can definitely affect your credit score, directly, or indirectly.

Here are some ways how credit cards affect your credit score:

Applying for multiple credit cards together

Applying for multiple credit cards in a short period of time can result in multiple inquiries on your credit report, which can in turn decrease your credit score and make it even harder to get approved for the credit applications that you are sending out.

In order to determine your eligibility and to understand what kind of risks you possess as a borrower, most lenders inquire about your credit score and run a check through your credit report.

Now, your credit report doesn’t just contain your currently active credit products, but it also contains the list of inquiries that have been run against your credit report. Even though there is no way of knowing whether these inquiries lead to rejection or approval, just through the credit file, too many inquiries in a short span can make lenders assume that you have been trying to get a new line of credit without any success.

Note that there are two kinds of credit inquiries – Hard and soft.

Soft inquiries do not affect your credit score in any way. Examples of soft credit inquiries include checking your own credit report or lenders checking your credit score to see which pre-approved offer you are eligible for.

But hard inquiries can affect your credit score. When you apply for a new credit card, it creates a hard inquiry on your credit file. Too many hard inquiries can lower your credit score by a few points easily. Though hard inquiries only stay on your credit report for over two years, after which they get dropped from your credit file and their impact on your credit score also vanishes.

Getting credit cards is one of the easiest and most convincing ways to build a good credit history. It allows you to show that you can manage your credit well which will directly lead to a better credit score.

But this can only be useful if you use your credit cards wisely. That is, you need to pay your credit card bills every month, in full and on time. If you only pay a part of your monthly bill, it's not counted as a complete payment.

Your remainder payment is rolled over to the next month and interest is usually applied to it. Moreover, it's also recommended that you use 30% or less of your credit limit every month. This in turn shows that you can manage your credit limit well which will also in turn improve your credit score.

On the other hand, if you keep missing out on credit repayments or if you keep reaching your credit limit every month, you will be perceived as an individual who cannot manage their credit well and this can affect your credit score in a negative way.

Increasing your credit mix

You may not have a credit card yet, but you may have other forms of credit like a personal loan or auto loan. But credit cards are different in the sense that they are considered revolving credit which allows you to borrow over and over again, as long as you don’t go beyond a set limit and you make at least a minimum payment.

By having a whole credit mix of different credit products like loans and credit cards, you get the ability to show the lenders that you can in fact manage your credit accounts effectively.

While there are many ways to use credit cards, the way you use your credit cards can impact your credit score and in turn determine your creditworthiness as well.

In order to maintain your credit score, you have to use your credit cards effectively, adopt a rather disciplined approach to repayment and always stay within the credit limit.

Here are the main tips to keep in mind in order to use your credit card effectively:

Timely payments

At the end of every monthly billing cycle, your credit card bill is generated and you get two options to repay your bill – You can either pay the complete outstanding amount or you can pay a minimum amount before the due date.

While it may be tempting to pay just the minimum amount and avoid late payment fees, it will not lower your total debt significantly. Your pending payment will get rolled over to the next month but before that, interest will be charged over it. This interest rate can be anywhere between 5% to 30% depending on the type of card you have. Before you know it, you will be falling into a debt trap with a big chunk of outstanding debt.

That is why, even if you have the option to just pay the minimum amount, you should always try to pay the entire amount or at least as much as you can.

Credit utilisation ratio

It is the ratio of the money that you spend through your credit card and the total credit limit that you have. A high ratio means you are overspending and utilizing almost the entirety of your credit limit, which can be bad for your credit score.

Additionally, it also has a positive impact on your credit score.

Credit card history

The length of your credit card history can also impact your credit score significantly. A card that you have been using for more than three years will have way more insights about your spending and repayment patterns, and it will affect your credit score more, as compared to a card that you have only used for a few months.

Therefore, it is always advisable to always retain your long-standing credit cards, use them more, and clear their dues in a timely manner instead of getting a whole new card.

Number of credit cards you have

To reduce the credit utilisation ratio and to increase spending limits, people may prefer to own multiple credit cards. While there is nothing wrong with owning several credit cards, you should make sure to track all the numerous card payments. Delayed payments can lead to increased interest or payment defaults which can, in turn, affect your credit score in a negative way.

Hence, it is always advisable to use only a limited number of credit cards – as many as you can manage conveniently.

When you close a credit card, you close down a line of credit available to you. This can in turn increase your credit utilisation ratio and subsequently decrease your credit score.

As a result, it is always recommended to keep your credit cards open and not get them permanently closed even if you won’t be using them for a while. By keeping your credit cards active, you increase the total line of credit available to you, as compared to the debt that you owe.

To keep the credit card active, you can add a small monthly recurring subscription to it like a gym membership or a streaming service.

Though it's important to keep that if you are paying high annual fees and interest over a card that you do not even need, you may just be burning a hole in your bank account by keeping it active. Moreover, when you have a credit card, you end up using it some way or the other, even if you don’t.

At the end of the day, you should only keep your credit card accounts open when you know you can manage them effectively.

Credit cards and the way you manage them can impact your credit score in a big way. To get a better idea about how your credit cards may be affecting your credit scores, monitor your credit reports and your credit scores regularly.

With ClearScore, you can check your credit score with free credit reports shared directly with you.


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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.